LATEST MUSIC

RSS

SEARCH

IS HYPERINFLATION STARTING? Rial falls 17% in since Sunday morning

That's 17% in a little over 50 hours. It's interesting to track the drop of the rial from one hour to the next during an amzing day. I'm usuing timed reports from Enduring America to show the stunning drop:

0700 GMT: In September, the Central Bank was struggling to prevent it crossing the symbolic marker of 13000:1. This morning, the rial stands at 16050:1.

0720 GMT: Parliament's Article 90 Commission documents an example of Government manipulation of the economy and its budgetary figures. The Commission claims that the Government, instead of transferring 500 billion Toman (about $320 million) in oil revenues to the Treasury, used the money for gasoline imports. The Government then sold the gasoline and, benefitting from the higher prices under subsidy cuts, made a "profit" of 70 billion Toman (about $45 million).

The "profit" was put in the Treasury but the Government never deposited the original oil revenue of $320 million. The outcome? The Government in effect grabbed almost $300 million of funds without making any declaration.

1005 GMT:The Iranian rial, which feel more than 5% on Sunday (see 0700 GMT), has slid another 2% this morning. It is now 16400:1 vs. the US dollar.

1420 GMT: Back from a holiday break to find the Iranian rial has plummeted further against the US dollar. It has dropped more than 10% in hours, now standing at 17800:1. On Sunday morning, it was 15200:1.

Thomas Erdbrinkquotes a steel trader in Tehran: "It's ugly. Everybody wants to buy steel just to have something that will keep its value."

As well as the decline in the Iranian currency, falling 40% in four months and 17% in the last two days ("WOW!" adds FG), gold prices are rising despite the decline in the global market. Gold coin in Tehran now sells for 655,000 Toman (about $405).

1450 GMT: One of the groups that will be hit particularly hard by the plummet in the Iranian currency is families with children studying abroad. Thomas Erdbrink offers one quote, "My son must return if this continues."

1510 GMT: Economy Watch. Another note amid the currency crisis --- Asr-e Iran claims that, as Iranians look to put their funds in something other than the Iranian rial, property prices in Tehran have risen 20% in recent weeks.

(PLEASE PARDON THE ODD INDENTATIONS ABOVE AND THE LACK OF PARAGRAPHS BELOW WHICH MAKE THIS POST HARD TO READ. I HAD PARAGRAPHS BUT HITTING "ENTER" DOESN'T FIX THE PROBLEM IN PREVIEW MODE SO I'VE GIVEN UP. IT'S A PROBLEM I'VE HAD BEFORE) :

I wrote about the hyperinflation danger in a post some time back and suggested readers might look up online"hyperinflation/Germany/1920's. Wikipedia might be a good place. You can see some of the same panic-stricken behavior here. Hyperinflation was an experience so devastating that it has made Germany extremely cautious ever since in its economic policies and which also helped bring down the Weimar Republic, which was replaced by the Nazis.

At that time, some readers wrote that some of the problem may be intentional and involve manipulation of the currency by Ahmadinejad who has done it before and needs election bribe money. In fact, you see an example above of how that works. Readers also also pointed to Iran's vast income from high oil prices.

Even so, Ahmadinejad is playing with fire. Human psychology plays a huge part. People have no more faith in the Islamic Republic's economic policies than they have in its elections and its justice system. Lack of trust and confidence in the Islamic Republic is weakening everything. When it comes to hyperinflation, widespread panic isn't easy to control. Its political effect will be to reduce popular support for the government to even lower levels if that's possible and it will hit some insiders hard (the rest will save the gold for themselves and let the people sink).

At some point the situation begins to resemble the game of musical chairs in which there is always once seat less than the number of players. Music plays and when it stops everyone tries to get a seat. The person who doesn't is "out." Then the music starts again. Similarly when no NO ONE WANTS TO GET STUCK with a deutsch mark or rial (the one who does being "out" or "the loser") so they'll take anything of value--gold, steel a bar of soap. As people run to the store to buy while there money is still good, this panic accelerates inflation. Storeowners may shut down or insist on something other than the local currency.

I recall how false rumors of a toilet paper shortage some years ago caused toilet paper prices to double or triple. Who wants to run out of toilet paper? You'd pass a store with a sign, "We have toilet paper!" and see roles of it on prominent display inside at a high price.

PS--Don't forget that if economic crisis forces some students to return home, they may be targeted by the regime for past demonstrations. Police state security forces may be awaiting many of them at the airport. Having just come back from countries with real freedoms they'll find it hard to adjust to the dictatorship at home in any case.

Coming Hyperinflation and/or Collapse

I would expect both Amrika and Europe to be more worried about their own alarming prospects for near-future depression and/or hyperinflationary collapse. I cannot help but wonder if all of this is some kind of divine payback for the shocking oppression which has been visited on the Iranian people by all three (Amrika, Europe and IRI/IRGC/Basij/Mullahs). To quote The Shadow: "As you sow Evil, so shall you reap Evil. The weed of crime bears (very) bitter fruit"! RIP Ayaz Marhoni, Mahmoud Asgari, Ali A., Mokhtar N., Ateqeh Rabini, Neda Soltani, Makwan Moloudzadeh, Alireza Molla-Soltani, + over 500,000 others, including both innocent victims of IRCG/Mullahs and innocent victims of War with Iraq (hamjensgara couples NOT excluded, or those driven to crime/smuggling by economic desperation).

On the 17 percent figure

It's possible the higher figure is based on the peak and prior to a slight but not necessarily containable recovery near the end of the day.

Whatever the case, if things are this bad before any decisions on oil sanctions, what is likely if such sanctions pass and possibly even earlier if the Saudis announce an oil production increase which would make sanctions more economiconally viable?

I admit it: My prediction that the Communist Party would fall by 2011 was wrong. Still, I'm
only off by a year.--Gordon G. Chang

FG: That fascinating artivle deserves a few excerpts because it draws
attention to how instability in China shares some of the same bases as
instability in Iran and in Arab countries.

EXCERPTS

-- we will witness either a crash or, more
probably, a Japanese-style multi-decade decline. Either way, economic troubles
are occurring just as Chinese society is becoming extremely restless.

--- Today, social change in
China is accelerating (FG: as in Iran)

-- The Communist Party, unable to mediate social discontent, has chosen
to step-up repression to levels not seen in two decades. (FG: check once again)

---China is much too
dynamic and volatile for the Communist Party's leaders to hang on (just
substitute Islamist mullahs, IRCG generals or Mahmoud's populist
fascists).

--In some
location next year, whether a small village or great city, an incident will get out
of control and spread fast (Iran after elections or potential hyperinflation?)

--Because people across the country share the same
thoughts, we should not be surprised they will act in the same way
(Isn't that true in Iran when it comes to feelings toward the regime?)

--This phenomenon, which has
swept North Africa and the Middle East this year, tells us that the nature of
political change around the world is itself changing, destabilizing even the
most secure-looking authoritarian governments. China (like the IRI) is by no means immune to
this wave of popular uprising, ...the Communist Party,
once the beneficiary of global trends, is now the victim of them.

So will China collapse? Weak governments can remain in place
a long time. Political scientists, who like to bring order to the inexplicable,
say that a host of factors are required for regime collapse and that China is
missing the two most important of them: a divided government and a strong
opposition.(FG: Iran however has both and the elections are likely to accelerate divisions).

At a time when crucial challenges mount, the Communist Party
is beginning a multi-year political transition and therefore
ill-prepared for
the problems it faces. There are already visible splits among Party
elites, and
the leadership's sluggish response in recent months...indicates
that the decision-making process in Beijing is deteriorating. (FG: Has
anyone noticed decision-making problems in the IRI lately?)

...And as for the existence of an opposition, the Soviet Union
fell without much of one.

Interesting report from Foreign Policy on Iran's economy

The article deals primarily with the effect of sanctions and the IRI's attempts to counter. Here's a few excerpts:

As the country that gave the world chess, it is only appropriate that
Iran's current sanctions standoff with the United States resembles a
game between two inept players. Tehran repeatedly makes bad moves;
Washington plays better but has no path to checkmate....

... China's leading refiner, Sinopec, halved
its January purchases of Iranian crude on a dispute over credit terms,
while Saudi supplies surged by a third. This is exactly the intention of
the amendment: to narrow the circle of Iran's customers to China and a
few others, giving them the ability to extract discounts and thus
starving the Islamic Republic of revenue.

This follows the stunning effectiveness of sanctions on Syria, where oil
exports have fallen almost to nothing, and Shell, Total and other
Western operators have withdrawn. (Of course, this has not stopped the
killing, and Syria is but a bit player in global oil markets.)...

Iran's response was surprisingly panic-stricken. It's hardly as if the tightening of sanctions has come as a surprise...One sign of panic is Iran's escalating rhetoric about the energy reserves it shares with its neighbors...The issue of the shared fields has surfaced episodically for years, but
highlighting it now in inflammatory terms puts pressure on Iran's Arab
neighbors...

(FG notes: Another example of heavy-handed choices--at home and abroad--increasing isolation and thus motivating neighbors to support oil sanction by boosting their own production).

...a Revolutionary Guards admiral announced
a war game in the Strait of Hormuz...
but in practice the United States could probably quickly reopen the
waterway, and would be supported by Europe, India, China and every other
major oil importer. (It's also worth noting that virtually all of
Iran's own exports go through the strait.)

On Dec. 20, semi-official news agency Mehr News announced
that Iran had blocked imports from the UAE..
The Iranian foreign minister quickly backed
away from this suggestion, but the damage was done: The Iranian riyal
plunged by 10 percent against the dollar as traders hurried to offload
the currency, and has now lost half its value in the past few months.

(FG notes: Another arm-twister backfires. Recall the British Embassy attack as well. These guys don't learn. They think they can bully the USA and the West as easily as they stomp their own people).

... The declining riyal is also part of President Mahmoud Ahmadinejad's
policy to help fill the government's budget deficit ahead of
parliamentary elections in 2012. This comes at the cost of worsening
inflation, already boosted by the removal of fuel and electricity
subsidies in late 2010 (officially 19 percent, but unofficial estimates
put it as high as 28 percent)...

(FG: As I noted, he is playing with fire).

Iran's own mismanagement of its economy and oil sector does it more damage than sanctions....

Iran's economy is in bad shape, and the country has not been more
isolated diplomatically since the early years of the revolution. But
Washington should not congratulate itself just yet....Oil sanctions are a bad idea if they work, and a bad idea if they fail...

(FG: Perhaps not if the Saudis can make up the difference and the mullahs are giving them every incentive to cut the knees out from under a long-run threat from a super-aggressive neighbor)

As for the shared fields -- with production potential of 1.1 million
barrels per day -- these are largely to be developed by domestic Iranian
companies linked to the Revolutionary Guards, enormously enriched by
smuggling, corruption, and sanctions evasion. Meanwhile the middle
class, historically the driver of democratization, is being decimated by
inflation and economic malaise...

(FG adds:...and by the regime's clubs, courts and jails).

Veterans of the Iran-Iraq war, the Iranian hard-liners have seen their
country survive even tougher times than today, and emerge, in their
view, with revolutionary fervor strengthened. For them to bow to
sanctions by making significant concessions on the nuclear issue would
be political suicide.

FG: Times have changed since those days when the regime still enjoyed enough popular legitimacy that young folks eagerly volunteered to function as human mine clearance devices. I doubt the regime can count on that kind of enthusiasm anymore.